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Novotna Inc.’s only temporary difference at the beginning and end of 2013 is caused by a $3 million deferred gain for tax purposes for an installment sale of a plant asset, and the related receivable (only one-half of which is classified as a current asset) is due in equal installments in 2014 and 2015. The related deferred tax liability at the beginning of the year is $1,200,000. In the third quarter of 2013, a new tax rate of 34% is enacted into law and is scheduled to become effective for 2015. Taxable income for 2013 is $5,000,000, and taxable income is expected in all future years.
\r\nInstructions
\r\n(a) Determine the amount reported as a deferred tax liability at the end of 2013. Indicate proper classification(s).
\r\n(b) Prepare the journal entry (if any) necessary to adjust the deferred tax liability when the new tax rate is enacted into law.
\r\n(c) Draft the income tax expense portion of the income statement for 2013. Begin with the line “Income before income taxes.” Assume no permanent differences exist.
Assume the same information as E19-14, except that at the end of 2013, Jennifer Capriati Corp. had a valuation account related to its deferred tax asset of $45,000.
\r\nInstructions
\r\n(a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming that it is more likely than not that the deferred tax asset will be realized in full.
\r\n(b) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming that it is more likely than not that none of the deferred tax asset will be realized.
Jennifer Capriati Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2013 due to a single cumulative temporary difference of $375,000. At the end of 2014, this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2014 is $820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2013.
\r\nInstructions
\r\n(a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming that it is more likely than not that the deferred tax asset will be realized.
\r\n(b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2014 to record the valuation account.
At the end of 2013, Lucretia McEvil Company has $180,000 of cumulative temporary differences that will result in reporting future taxable amounts as shown on the next page.
\r\n2014 $ 60,000
\r\n2015 50,000
\r\n2016 40,000
\r\n2017 30,000
\r\n$180,000
\r\nTax rates enacted as of the beginning of 2012 are:
\r\n2012 and 2013 40%
\r\n2014 and 2015 30%
\r\n2016 and later 25%
\r\nMcEvil’s taxable income for 2013 is $320,000. Taxable income is expected in all future years.
\r\nInstructions
\r\n(a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2013, assuming that there were no deferred taxes at the end of 2012.
\r\n(b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2013, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2012.
The following facts relate to Duncan Corporation.
\r\n1. Deferred tax liability, January 1, 2014, $60,000.
\r\n2. Deferred tax asset, January 1, 2014, $20,000.
\r\n3. Taxable income for 2014, $105,000.
\r\n4. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $230,000.
\r\n5. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $95,000.
\r\n6. Tax rate for all years, 40%. No permanent differences exist.
\r\n7. The company is expected to operate profitably in the future.
\r\nInstructions
\r\n(a) Compute the amount of pretax financial income for 2014.
\r\n(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
\r\n(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”
\r\n(d) Compute the effective tax rate for 2014.
At December 31, 2013, Belmont Company had a net deferred tax liability of $375,000. An explanation of the items that compose this balance is as follows3
\r\nResulting Balances
\r\nTemporary Differences in Deferred Taxes
\r\n1. Excess of tax depreciation over book depreciation $200,000
\r\n2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2014. The loss will be deducted on the tax return when paid. (50,000)
\r\n3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment. 225,000
\r\n$375,000 In analyzing the temporary differences, you find that $30,000 of the depreciation temporary difference will reverse in 2014, and $120,000 of the temporary difference due to the installment sale will reverse in 2014. The tax rate for all years is 40%.
\r\nInstructions
\r\nIndicate the manner in which deferred taxes should be presented on Belmont Company’s December 31, 2013, balance sheet.
Felicia Rashad Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2006 through 2014 as follows.
\r\nIncome (Loss) Tax Rate
\r\n2006 $ 29,000 30%
\r\n2007 40,000 30%
\r\n2008 17,000 35%
\r\n2009 48,000 50%
\r\n2010 (150,000) 40%
\r\n2011 90,000 40%
\r\n2012 30,000 40%
\r\n2013 105,000 40%
\r\n2014 (60,000) 45%
\r\nPretax financial income (loss) and taxable income (loss) were the same for all years since Rashad has been in business. Assume the carryback provision is employed for net operating losses. In recording the benefits of a loss carryforward, assume that it is more likely than not that the related benefits will be realized.
\r\nInstructions
\r\n(a) What entry(ies) for income taxes should be recorded for 2010?
\r\n(b) Indicate what the income tax expense portion of the income statement for 2010 should look like.
\r\nAssume all income (loss) relates to continuing operations.
\r\n(c) What entry for income taxes should be recorded in 2011?
\r\n(d) How should the income tax expense section of the income statement for 2011 appear?
\r\n(e) What entry for income taxes should be recorded in 2014?
\r\n(f) How should the income tax expense section of the income statement for 2014 appear?
The pretax financial income (or loss) figures for Jenny Spangler Company are as follows.
\r\n2009 $160,000
\r\n2010 250,000
\r\n2011 80,000
\r\n2012 (160,000)
\r\n2013 (380,000)
\r\n2014 120,000
\r\n2015 100,000
\r\nPretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2009 and 2010 and a 40% tax rate for the remaining years.
\r\nInstructions
\r\nPrepare the journal entries for the years 2011 to 2015 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company uses the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)
Button Company has the following two temporary differences between its income tax expense and income taxes payable.
\r\n2014 2015 2016
\r\nPretax fi nancial income $840,000 $910,000 $945,000
\r\nExcess depreciation expense on tax return (30,000) (40,000) (10,000)
\r\nExcess warranty expense in fi nancial income 20,000 10,000 8,000
\r\nTaxable income $830,000 $880,000 $943,000
\r\nThe income tax rate for all years is 40%.
\r\nInstructions
\r\n(a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016.
\r\n(b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months.
\r\n(c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”
Instructions
\r\nComplete the following statements by filling in the blanks.
\r\n(a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income.
\r\n(b) If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_______.
\r\n(c) Deferred taxes ________ (are, are not) recorded to account for permanent differences.
\r\n(d) If a taxable temporary difference originates in 2014, it will cause taxable income for 2014 to be
\r\n________ (less than, greater than) pretax financial income for 2014.
\r\n(e) If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of $_______.
\r\n(f) If a corporation’s tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for “Income taxes payable” if the company has made estimated tax payments of $36,500 for Year 2? $________.
\r\n(g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______ (debit, credit) to the Income Tax Expense account.
\r\n(h) An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $________.
\r\n(i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized.
\r\n(j) If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _______ (expense, benefit).
Listed below are items that are commonly accounted for differently for financial reporting purposes than they are for tax purposes.
\r\nInstructions
\r\nFor each item below, indicate whether it involves:
\r\n(1) A temporary difference that will result in future deductible amounts and, therefore, will usually give rise to a deferred income tax asset.
\r\n(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give rise to a deferred income tax liability.
\r\n(3) A permanent difference.
\r\nUse the appropriate number to indicate your answer for each.
\r\n(a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation method is used for financial reporting purposes for some plant assets.
\r\n(b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when they are received.
\r\n(c) ______ Expenses are incurred in obtaining tax-exempt income.
\r\n(d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
\r\n(e) ______ Installment sales of investments are accounted for by the accrual method for financial reporting purposes and the installment method for tax purposes.
\r\n(f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets’ lives are shorter for tax purposes.
\r\n(g) ______ Interest is received on an investment in tax-exempt municipal obligations.
\r\n(h) ______ Proceeds are received from a life insurance company because of the death of a key officer.
\r\n(The company carries a policy on key officers.)
\r\n(i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations.
\r\nThe cost method is used in accounting for the related investments for financial reporting purposes.
\r\n(j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
\r\n(k) ______ Expenses on stock options are accrued for financial reporting purposes.
The following facts relate to Krung Thep Corporation.
\r\n1. Deferred tax liability, January 1, 2014, $40,000.
\r\n2. Deferred tax asset, January 1, 2014, $0.
\r\n3. Taxable income for 2014, $95,000.
\r\n4. Pretax financial income for 2014, $200,000.
\r\n5. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $240,000.
\r\n6. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $35,000.
\r\n7. Tax rate for all years, 40%.
\r\n8. The company is expected to operate profitably in the future.
\r\nInstructions
\r\n(a) Compute income taxes payable for 2014.
\r\n(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
\r\n(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”
Zurich Company reports pretax financial income of $70,000 for 2014. The following items cause taxable income to be different than pretax financial income.
\r\n1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
\r\n2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000.
\r\n3. Fines for pollution appear as an expense of $11,000 on the income statement.
\r\nZurich’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2014.
\r\nInstructions
\r\n(a) Compute taxable income and income taxes payable for 2014.
\r\n(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
\r\n(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”
\r\n(d) Compute the effective income tax rate for 2014.
Bandung Corporation began 2014 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2014, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2014 is $525,000, the tax rate for all years is 40%, and taxable income for 2014 is $405,000.
\r\nInstructions
\r\n(a) Compute income taxes payable for 2014.
\r\n(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
\r\n(c) Prepare the income tax expense section of the income statement for 2014 beginning with the line “Income before income taxes.”
The following information is available for Wenger Corporation for 2013 (its first year of operations).
\r\n1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse equally over the years 2014–2017.
\r\n2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in
\r\n2014.
\r\n3. Pretax financial income, $300,000.
\r\n4. Tax rate for all years, 40%.
\r\nInstructions
\r\n(a) Compute taxable income for 2013.
\r\n(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013.
\r\n(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming taxable income of $325,000.
South Carolina Corporation has one temporary difference at the end of 2014 that will reverse and cause taxable amounts of $55,000 in 2015, $60,000 in 2016, and $65,000 in 2017. South Carolina’s pretax financial income for 2014 is $300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2014.
\r\nInstructions
\r\n(a) Compute taxable income and income taxes payable for 2014.
\r\n(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
\r\n(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”
Youngman Corporation has temporary differences at December 31, 2014, that result in the following deferred taxes.
\r\nDeferred tax liability—current $38,000
\r\nDeferred tax asset—current $62,000
\r\nDeferred tax liability—noncurrent $96,000
\r\nDeferred tax asset—noncurrent $27,000
\r\nIndicate how these balances would be presented in Youngman’s December 31, 2014, balance sheet.
Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2014.
Rode Inc. incurred a net operating loss of $500,000 in 2014. Combined income for 2012 and 2013 was $350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward. Rode expects to return to profitability in 2015.
Conlin Corporation had the following tax information.
\r\nYear Taxable Income Tax Rate Taxes Paid
\r\n2012 $300,000 35% $105,000
\r\n2013 $325,000 30% $ 97,500
\r\n2014 $400,000 30% $120,000
\r\nIn 2015, Conlin suffered a net operating loss of $480,000, which it elected to carry back. The 2015 enacted tax rate is 29%. Prepare Conlin’s entry to record the effect of the loss carryback.
\r\n
At December 31, 2014, Fell Corporation had a deferred tax liability of $680,000, resulting from future taxable amounts of $2,000,000 and an enacted tax rate of 34%. In May 2015, a new income tax act is signed into law that raises the tax rate to 40% for 2015 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.
Clydesdale Corporation has a cumulative temporary difference related to depreciation of $580,000 at December 31, 2014. This difference will reverse as follows: 2015, $42,000; 2016, $244,000; and 2017, $294,000. Enacted tax rates are 34% for 2015 and 2016, and 40% for 2017. Compute the amount Clydesdale should report as a deferred tax liability at December 31, 2014.
Shetland Inc. had pretax financial income of $154,000 in 2014. Included in the computation of that amount is insurance expense of $4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland’s journal entry to record
\r\n2014 taxes, assuming a tax rate of 45%.
Mitchell Corporation had income before income taxes of $195,000 in 2014. Mitchell’s current income tax expense is $48,000, and deferred income tax expense is $30,000. Prepare Mitchell’s 2014 income statement, beginning with Income before income taxes.
At December 31, 2014, Hillyard Corporation has a deferred tax asset of $200,000. After a careful review of all available evidence, it is determined that it is more likely than not that $60,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.
\r\n
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